While it is common practice in Canada to seek certain emergency
orders on an ex parte basis (i.e. where only one party (and not the
adversary) appears before a judge), applicants for such orders are
held to a high standard of candour with the court. Recently, the
Ontario Superior Court of Justice (Commercial List) took the
unusual step of finding that the initial order (the "Initial
Order") granting protection under the Companies' Creditors
Arrangement Act (Canada) (the "CCAA") was void ab initio
as against all of the applicants thereto (CanaSea Petrogas Group
Holdings Limited (Re), 2014 ONSC 6116). This was because
subsequently produced evidence did not support the Court's
initial conclusions regarding the applicants' eligibility for
CCAA protection. In reaching this decision, the Court was very
critical of the applicants for not fulfilling their high
obligations of candour and disclosure on the ex parte
hearing.
In September 19, 2014, CanaSea Petrogas Holdings Limited
("CPGH"), a Canadian holding company, and its
subsidiaries (the "Applicants") sought CCAA protection on
an ex parte basis. The other Applicants included two Singaporean
companies, one of which, CanaSea Oil and Gas Group Pte. Ltd.
("COGG"), was the issuer of certain notes representing
49% of the debt obligations of the Applicants, and two Saskatchewan
companies, one of which, CanaSea Oil and Gas Limited
("COGL"), held the major assets of the group being
petroleum and natural gas licenses.
At the ex parte hearing, the Applicants relied on what they
purported to be unaudited financial statements and advised the
Court that the Applicants were eligible for CCAA protection as they
each (i) had liabilities in excess of $5 million, (ii) were unable
to meet their obligations as they came due; and (iii) had finances
"inextricably intertwined" through intercompany advances.
The Applicants also advised the Court that, although the
Singaporean company (COGG) was the issuer of the notes, its
Saskatchewan subsidiaries were "on the hook" for the
notes due to the intercompany obligations thereby bringing the
Applicants within the insolvency and $5 million debt thresholds
required by the CCAA. On the basis of these representations, the
Court granted the Initial Order.
Subsequently, COGG's noteholders sought a declaration that the
Initial Order did not apply to COGG alleging that their loan
documents designated Singapore as the venue for dispute resolution
and that COGG did not qualify for CCAA protection because it did
not have assets or business in Canada. However, the evidence
produced by the noteholders lead the Court to also question the
eligibility of the other Applicants. More specifically, while the
Applicants purported to have included in the evidence unaudited
financial statements that proved their insolvency and liabilities
in excess of $5 million; instead they included only profit and loss
statements or general ledgers. These documents alone could not
demonstrate insolvency or these requirements. In addition, there
was no evidence of intercompany loans that supported their
representation that the Applicants' finances were inextricably
intertwined.
The Court held that its previous conclusions were, in fact, wrong
and that there was no evidence of the Saskatchewan subsidiary's
(COGL's) insolvency independent of COGG. While the Canadian
holding company and the two Singaporean companies were insolvent
and had liabilities in excess of $5 million, the holding company
did not do business in Canada, and the Singaporean companies, which
were the real debtors in the proceeding, had very little connection
to Canada. The Court held that, had it previously been aware of
these facts, it would not have exercised its discretion to grant
the Initial Order and ordered the Initial Order void ab initio as
against all of the Applicants. The Court also found that the
Applicants had not fulfilled their statutory obligation under
section 10(2)(c) of the CCAA to disclose all financial statements
prepared during the year before their CCAA application and held
that it was "not satisfied that the [A]pplicants had filled
their high obligations of candor and disclosure on an ex parte
application."
The Applicants sought leave to appeal from the Ontario Court of
Appeal on the basis that they were denied procedural fairness. They
argued that the lower court terminated the Initial Order for their
failure to make full and frank disclosure and, had they known this
was the issue, they would have been able to satisfy the lower court
that the disclosure made was adequate.
A single judge of the Court of Appeal denied leave to appeal
(CanaSea PetroGas Group Holdings Limited, 2014 ONCA 824).
The Court disagreed with the Applicants' characterization of
the lower court's decision as an issue of disclosure. Instead,
it reiterated the deference given to CCAA judges and deferred to
the lower court's findings. The Court also held that the
Applicants were unable to provide any authority to support their
assertion of a common law doctrine of "common enterprise
insolvency" and, therefore, simply because the two Singaporean
companies were part of a larger group headed by a Canadian holding
company, they could not claim the benefit of CCAA protection in
respect of debt incurred in Singapore that is governed by Singapore
law.
This case demonstrates that applications for insolvency proceedings
on an ex parte basis will require a high level of disclosure and
candour with the court. Companies and individuals who are
considering seeking court protection from their creditors on an ex
parte basis must be careful to err on the side of caution and
ensure that all relevant financial and other information is
disclosed to the court and interpreted fairly. In addition, this
case demonstrates that a solvent company may not be eligible for
CCAA protection where only its affiliated companies are
insolvent.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.